FEDERAL PROPOSALS TO RESTRUCTURE MEDICAID: WHAT COULD THEY MEAN FOR CONNECTICUT?

Transcription

1 FEDERAL PROPOSALS TO RESTRUCTURE MEDICAID: WHAT COULD THEY MEAN FOR CONNECTICUT? Commissioned by: Anthem Foundation of Connecticut, Inc., Children s Health Council and the Connecticut Health Foundation Prepared by: Joan Alker, Cindy Mann, Fouad Pervez of the Georgetown University Health Policy Institute July 2003

2 TABLE OF CONTENTS Overview Introduction An Overview of the President s Proposal How Would Connecticut Fare? Other Approaches Conclusion Figures and Tables: Figure 1: Elderly and Disabled Account for Most of the CT Medicaid Costs Figure 2: Income Eligibility Standards in CT for Medicaid by Eligibility Group Figure 3: CT has Higher than Average Numbers of Optional Elderly and Disabled Beneficiaries Figure 4: Potential Loss of State Spending Under Maintenance of Effort (MOE) Figure 5: Matching System Creates Incentives to Maintain State Investment in Optional Coverage Figure 6: Matching System Creates Incentives for State to Invest in Optional Coverage Figure 7: Share of Medicaid Spending on the Elderly is Higher in CT than the US (2000) Figure 8: Medicaid Fills Medicare Gaps Table 1: Medicaid Expenditures,Average Annual Growth Rates ( , , ) Table 2: Medicaid Expenditures,Average Annual Growth ( , ) Appendix Table 1: Medicaid Mandatory and Optional Eligible Groups Appendix Table 2: Medicaid Statutory Services Appendix Table 3: Comparison of CT Medicaid to Federal Employee Health Benefits Program

3 OVERVIEW Changes to the Medicaid program are under discussion at both the state and federal levels. Much of the interest in Medicaid restructuring arises from increases in Medicaid costs following a period of relatively slow growth. In fiscal year 2004, Medicaid spending nationally is predicted to rise by 7 percent. Connecticut s Medicaid expenditures, which historically have grown lower than the national average, are projected to grow by 8.7 percent in FY States have been confronted with this increase at a time when state revenues are declining sharply. A recent review of state budget actions found that states have responded in a variety of ways including reducing payments to providers, eliminating services, increasing cost-sharing, and, in some cases, reducing eligibility for the program. 2 A few states have not made significant changes in their Medicaid programs, choosing to maintain their recent coverage gains and improvements. Medicaid serves as the nation s primary public health insurance program and, especially in times of recession, as the nation s health care safety net. Declining state revenues CT Medicaid s rising expenditures 2

4 Medicaid s cost increase closely mirrored the increase in premium costs in the private sector, yet much of the growth in Medicaid costs in 2002 came about because the program served more people. 3 Medicaid serves as the nation s primary public health insurance program and, especially in times of recession, as the nation s health care safety net. In addition, a growing share of Medicaid costs stem from its role as a backstop for the shortcomings of the Medicare program providing prescription drug and long-term care coverage that Medicare does not offer. Medicaid is a joint federalstate program with the federal government on average paying 57 percent of the costs, and states administering the program within general federal guidelines. Medicaid is also the largest single source of federal funding for states, and these federal funds help stimulate the local economy. In FY 2003, Connecticut will receive an estimated $1.9 billion in federal funding through the Medicaid program. 4 Given the growth in Medicaid costs, policymakers are looking for ways to reform the program. Perhaps the most prominent of such proposals so far is contained in the Administration s FY 2004 budget proposal.the proposal would restructure many of the core features of the Medicaid program and offer states a limited amount of upfront funds in exchange for accepting a ten-year cap on federal Medicaid spending. This cap would apply to approximately two-thirds of Medicaid spending nationwide spending for persons and benefits that fall into optional categories under federal law. For states that choose to participate, the capped allotment structure would replace the current system of open-ended federal funding. Some states, such as Connecticut, would see a higher percentage of their funding fall under the cap because a larger proportion of their spending falls into the optional categories. The Administration s proposal also eliminates the State Children s Health Insurance Program (SCHIP) [in Connecticut Husky B ] for participating states by rolling SCHIP funding into the revised Medicaid program. Governor John Rowland was an early and vocal supporter of the Administration s proposal. In testimony before the U.S. House Congressional committee with jurisdiction over Medicaid, Governor Rowland described the Administration s proposal as a home run. 5 But at its winter meeting in February 2003, the National Governors Association (NGA) declined to endorse the Administration s proposal largely because of concerns about the cap on federal funding. Instead the NGA formed a bipartisan Task Force to consider alternative approaches. Governor Rowland was appointed to the Task Force along with nine other Governors five from each party. 6 After much deliberation, the Task Force was unable to come to a bipartisan agreement. 7 The high stakes for all states and their residents inherent in any major restructuring of the Medicaid program underscore the need for careful analysis and reflection. This report examines how Connecticut would fare under the President s proposal, and briefly considers alternative approaches. 3

5 INTRODUCTION Medicaid currently serves 51.5 million people across the country. This includes 25.9 million children, 12.7 million parents, 8.2 million people with disabilities and 4.8 seniors. 8 In Connecticut, just under 400,000 persons receive their health care through Medicaid 75 percent of these enrollees are children and their parents, the remainder are seniors and people with disabilities. 9 Medicaid serves as a vital health care safety net for these persons by providing comprehensive, low-cost coverage. In addition Medicaid provides long-term care, including nursing home care and community-based services for seniors and adults and children with disabilities, and acts as an important supplement to the Medicare program for low-income Medicare beneficiaries by providing prescription drug coverage and paying Medicare cost-sharing. People with disabilities and seniors constitute 27 percent of the beneficiaries but account for 82 percent of 27% Connecticut s Medicaid spending. 4

6 Who does Medicaid serve? By far, the single largest group of Medicaid beneficiaries in Connecticut and nationwide is children. However children and their parents are the least costly beneficiaries. While low-income children and their parents comprise close to three-fourths of Connecticut s Medicaid beneficiaries, they account for less than one-fifth of total spending. People with disabilities and seniors constitute 27 percent of the beneficiaries but account for 82 percent of Connecticut s Medicaid spending. 10 Figure 1 Elderly and Disabled Account for Most of the CT Medicaid Costs 13.5% 56.1% 4.7% 38.5% 17.0% 13.6% 43.0% 13.3% ENROLLEES EXPENDITURES Source: Centers for Medicare and Medicaid Services MSIS data, Data for 2001 in Connecticut is incomplete. Children Adults Blind/Disabled Elderly 5

7 Figure 2 Income Eligibility Standards in CT for Medicaid by Eligibility Group 300% 250% 300% SCHIP = Husky B Medicaid = Husky A Persons with higher income and substantial medical costs can % of Poverty Line 200% 150% 100% 185% 185% 100% 104% 104% 80% spend down to become eligible 50% 0% Pregnant Woman Children under 19 *Parents **Seniors **People with Disabilities ***Medically Needy * Eligibility for parents was lowered from 150 percent of Federal Poverty Level (FPL) to 100 percent effective April 1, ** Source: Aged, Blind, and Disabled State Summaries, National Association of State Medicaid Directors, based on standards in effect on October, 2001 (see ***Income levels for medically needy vary based on regions in CT. The medically needy income level in the most populated region in the state is 80 percent. Medicaid beneficiaries and services fall into two categories optional and mandatory. For example, states are required to cover children ages 6-18 years whose family incomes fall below the poverty line, and younger children must be covered up to 133 percent of Federal Poverty Level (FPL) [$20,296 annual income for a family of three in 2003]. Almost all states, including Connecticut, have chosen to cover children through Medicaid at higher income ranges these children receive so-called optional coverage. Connecticut covers pregnant women and children up to 185 percent of FPL through its Medicaid Husky A program for a family of three this equates to income under $28,232. Children above the Medicaid income levels are covered up to 300 percent of FPL in Husky B, the state s SCHIP program (for a list of optional and mandatory groups see Appendix Table 1). Approximately one-third of all Medicaid beneficiaries nationwide are covered through optional categories. Connecticut s Medicaid program includes a higher proportion of optional beneficiaries especially with respect to people with disabilities and seniors. Across the United States, 25 percent of people with disabilities are covered through optional categories, but in Connecticut 65 percent are optional more than two and a half times the national average. Similarly seniors are covered in optional categories at a much higher rate in Connecticut than the national average 87 percent compared to 60 percent. In Connecticut virtually all nursing home residents 98 percent are optional beneficiaries. 11 6

8 Figure 3 CT has Higher than Average Numbers of Optional Elderly and Disabled Beneficiaries CT 86.7% US 60.0% 65.4% 24.9% % of Elderly that are Optional % of Disabled that are Optional Source: Centers for Medicare and Medicaid Services MSIS data, What services are provided through Medicaid? Medicaid requires a comprehensive set of services for children known as the Early Periodic Screening Diagnosis and Treatment (EPSDT) benefit and a more limited set of services for adults. Prescription drugs are an optional service for all adult beneficiaries (for a complete list of mandatory and optional services see Appendix Table 2). Other commonly provided optional services include prosthetic devices, hearing aids, vision and dental care. Nationwide, 90 percent of overall Medicaid long-term care expenditures are considered optional. For adults, the Medicaid benefits package is similar to major employer-sponsored packages with the addition of benefits like long-term care and other services needed especially by seniors and people with disabilities that private insurance typically does not provide (see Appendix,Table 3). How is Medicaid financed? Medicaid is jointly financed by the federal and state governments. It is an open-ended, federal funding source based on a matching system. For every dollar that a state spends on health care services that comports with federal Medicaid requirements and options, the state is assured of receiving between 50 cents and 78 cents from the federal government. Connecticut s matching rate is 50 percent. 7

9 Why are Medicaid costs rising? Growing Medicaid costs reflect increases in costs across the health care system, higher costs for the elderly and people with disabilities, and the program s role as a crucial safety net in times of economic downturn. Governor Rowland s proposed budget notes increases in private sector health costs and identifies Health care inflation in the state budget (is) the single source of the greatest increase in costs. 12 Nationwide, per person health care costs in Medicaid have actually been growing at a significantly lower rate than costs in the private sector. Private health insurance premiums rose by an average of 7.1 percent from , while Medicaid costs, after adjusting for increases in enrollment, grew by 4.76 percent over the same period of time 13. In Connecticut, the growth in state employee health plan costs for FY 2004 is projected to be 25 percent, a much higher rate of growth than the 8.7 percent anticipated for Medicaid spending. 14 Connecticut is one of a few states that responded to this budget crisis by reducing eligibility. The state recently adopted cuts in parent eligibility for its HUSKY program by lowering eligibility from 150 percent to 100 percent of poverty. This change is expected to result in the loss of health coverage for approximately 19,000 parents. 15 In addition, the state has already undertaken a number of measures to reduce the cost of prescription drugs, cited in the Governor s budget as one of the main causes of increasing costs in the state s budget. 16 The Governor has a number of additional proposals in this year s biennial budget, and a number of additional changes to Medicaid/SCHIP eligibility and benefits may be considered. Final action by the legislature is pending. To respond to the severe fiscal pressures that many states are facing, Congress included a $20 billion package of state aid in the recently enacted tax cut legislation. As a result, Connecticut will receive a temporary increase in its federal matching assistance percentage from 50 percent to percent. Under this provision, Connecticut can expect to receive $132.6 million in additional Medicaid dollars for the period between April 2003 and June In addition, Connecticut will receive approximately $116 million in state social services funding. 17 Health care inflation in the state budget (is) the single source of the greatest increase in costs. 12 According to the Governor s Budget 8

10 AN OVERVIEW OF THE PRESIDENT S PROPOSAL As part of its FY 2004 budget proposal, the Administration announced a sweeping proposal that would fundamentally restructure both the Medicaid and SCHIP programs. Under the proposal states would have two options: They could continue to run Medicaid and SCHIP under existing rules and receive the normal federal Medicaid and SCHIP federal matching payments. OR States could choose to turn their Medicaid programs into a block grant and merge their federal Medicaid and SCHIP funds. States choosing this route would receive some upfront additional federal funding in exchange for agreeing to capped federal payments starting in FY While details of the proposal are still evolving, the Administration s approach includes three key elements: Capped federal payments. The current system in which the federal government shares the full cost of Medicaid coverage would be replaced with a system in which states receive capped allotments (combining Medicaid and SCHIP funding) on a yearly basis.these payments would be based on FY 2002 spending, trended forward to account for some growth in costs. If costs grow at rates that are higher than those that are built into the ten-year block grant payments, states would receive no additional federal payments or only relatively minor adjustments based on certain pre-determined factors. An end to the federal matching payment system. The current system in which federal dollars are provided to states as a match on a state s investment of its own funds would be replaced by a maintenance of effort (MOE) requirement. States could receive their full federal allotment as long as they maintained a prescribed level of spending.the MOE requirement would be based on FY 2002 spending and grow at slower rates than state spending is projected to grow under current law. Because the two streams of funds (federal and state) would no longer be tied together and the MOE requirement would be set below the level of spending states are otherwise expected to spend, states could lower their Medicaid spending without losing federal dollars Elimination or revision of many beneficiary standards and protections. In exchange for accepting caps on federal funding, states would be granted much broader programmatic flexibility than they have today. The Administration s proposal would drop virtually all federal Medicaid standards or protections for some beneficiaries under Medicaid and would substantially modify the standards and protections that would apply to most optional groups of beneficiaries. Some changes could be adopted even for mandatory groups of Medicaid beneficiaries. 9

11 HOW WOULD CONNECTICUT FARE? As described above, the President s proposal to restructure Medicaid would end open-ended federal matching payments to states that select the block grant option and allow states to reduce their state Medicaid spending. In exchange for capped federal funding, many of the federal standards regarding eligibility, benefits and cost sharing and other consumer protections would be eliminated or modified substantially.the new structure would offer states some new opportunities to improve coverage, but the financing changes would make it unlikely that states could take advantage of these opportunities and instead could push states to reduce coverage, consumer safeguards, and provider payments.this section of the report considers the risks posed by block grant financing in light of some of the factors unique to Connecticut that could exacerbate the problems that Connecticut might face under a block grant structure. By eliminating open-ended federal matching payments, the block grant approach would shift the risk of higher costs onto states, local providers, and beneficiaries. 10

12 Capped federal payments would shift the risk of higherthan-projected costs onto the state. By eliminating open-ended federal matching payments, the block grant approach would shift the risk of higher costs onto states, local providers, and beneficiaries. Health coverage and long-term care costs are notoriously difficult to predict at either the state or the federal level. The Congressional Budget Office s 1998 projections of federal Medicaid spending for 2002 turned out to be off by 12 percent, a $17 billion miscalculation. 18 Ten-year projections are even more difficult to make with any degree of accuracy, yet the total amount of block grant funds that would be available for allocation to states between 2004 and 2013 would be determined based on projections developed in Some adjustments could be built into the annual block grant payments, but by definition, no pre-set formula distributing a finite amount of funds to states could accommodate each state s needs fully and in a timely and equitable way. A myriad of factors influence the level of Medicaid spending, some of which cannot be tracked with accurate state-based data and some of which can only be recognized and documented well after the fact. 19 Consider, for example, the impact that AIDS and HIV have had on Medicaid costs. Medicaid is the largest source of funding for AIDS health care services in the United States. In 1983, however, only 28 new number AIDS cases were reported in Connecticut. By 1993, the number had risen to 1, Few predicted that jump or the expense that would be incurred by Medicaid programs as a result of AIDS and HIV. Unforeseeable costs, such as those that flow from the outbreaks of new diseases like Severe Acute Respiratory Syndrome (SARS), the consequences of bioterrorism, or new breakthroughs in medical technology cannot be accommodated under a block grant structure. Under current law, a state facing higher than anticipated health care costs may choose to curtail program coverage or it may pay those higher costs in partnership with the federal government. In recent years, Connecticut has chosen to do both it assumed some higher costs in Medicaid, sharing half those costs with the federal government, and it reduced coverage and benefits. Had a block grant been in place, Connecticut would not have had the option of sharing any of the higher costs with the federal government if it had already been spending its capped allotment. Capped federal funding eliminates perhaps the most fundamental aspect of the flexibility granted to states under the Medicaid program the flexibility of having federal funding levels respond automatically and fully to state costs. 11

13 Connecticut would have a higherthan-average share of its spending subject to capped federal payments. The risks posed by capped federal funding could be particularly large for Connecticut because a largerthan-average share of Connecticut s spending would be subject to the capped federal payments. As noted above, the President s proposal would place all optional spending under capped allotments for states choosing the block grant option.the more funding that is under a cap, the greater the financial risk that is borne by the state. For the nation as a whole, about 65 percent of all Medicaid spending is optional, meaning that the average state would assume the risk of higher-thanprojected costs with respect to about two-thirds of its spending. 21 Each state is unique, however, in terms of how much it spends on mandatory versus optional populations and services. Since states do not divide their programs or report their spending based on these distinctions, it is difficult to know exactly what the split would be for Connecticut, but it appears that a substantially higher share of Connecticut s costs would fall within the capped allotments. This is in part due to the choices Connecticut has made to adopt many federal options, but it is largely due to the cost of serving elderly people in nursing homes throughout the state. Connecticut covers a relatively high portion of its elderly residents under Medicaid; and, as noted above, most of the elderly people covered under Medicaid are optional beneficiaries. These optional elderly individuals accounted for 40.6 percent of all Medicaid spending in the state, compared to 20.3 percent for the U.S. average. Connecticut s costs for optional people with disabilities are similarly large relative to the nation as a whole. These individuals accounted for 25.6 percent of all Medicaid spending in the state,compared to 13.9 percent for the U.S. average. 22 If a block grant were implemented in Connecticut along the lines of the President s proposal, the state would be giving up its open-ended federal Medicaid payments for these costs and assuming the risk of higher-than-projected costs on a larger share of its spending than many other states. The risks posed to Connecticut would be significant particularly in light of the growth in the cost of serving the elderly and people with disabilities and the aging population. 12

14 Connecticut s block grant payment would likely grow at a relatively slow rate under the President s proposal. The Administration s proposal would set each state s capped federal payment based on the amount of federal payments (in Medicaid and SCHIP) that the state received in Since Connecticut s spending per beneficiary, particularly for the elderly, is higher than average, its base payment would reflect those higherthan-average costs. The state s annual block grant payment, however, would likely grow at a lower-thanaverage rate, increasing the risk that Connecticut could face a federal funding shortfall over the course of the ten-year block grant period. Under the Administration s approach, the total amount of federal funds that would be distributed to states would grow each year according to CBO s ten-year projections of federal Medicaid spending growth (the average annual growth rate is 9.39 percent), but the funds would then be allocated to states based on each state s historical growth rate. This approach was chosen to avoid a one-size-fits allow growth rate for state allotments, but it could be particularly problematic for states like Connecticut that have had low growth rates in recent years. Between 1998 and 2001, Connecticut s overall Medicaid expenditures grew more slowly than almost every other state, ranking 49 out of 51 states (including the District of Columbia). Its average annual growth rate during this period was 5.26 percent compared to 8.76 percent for the nation. Looking at a longer period, between 1993 and 2001, Connecticut still ranked close to the bottom; 45 out of the 51 states (including D.C.). 23 The state s annual block grant payment, however, would likely grow at a lower-than-average rate, increasing the risk that Connecticut could face a federal funding shortfall over the course of the ten-year block grant period. 13

15 Table 1 Medicaid Expenditures, Average Annual Growth Rates Alabama 7.7 percent 7.41 percent 7.5 percent Alaska 9.0 percent percent 12.5 percent Arizona 6.3 percent percent 9.8 percent Arkansas 6.2 percent 9.07 percent 7.8 percent California 5.0 percent 9.74 percent 8.2 percent Colorado 5.0 percent percent 7.0 percent Connecticut 6.6 percent 5.36 percent 5.4 percent Delaware 12.8 percent percent 11.9 percent District of Columbia 3.8 percent 9.52 percent 5.5 percent Florida 6.8 percent 9.48 percent 8.6 percent Georgia 6.4 percent percent 8.5 percent Hawaii 13.4 percent 2.18 percent 8.1 percent Idaho 9.6 percent percent 11.4 percent Illinois 6.9 percent 6.82 percent 7.3 percent Indiana -3.2 percent percent 5.6 percent Iowa 6.3 percent 6.08 percent 7.5 percent Kansas 3.7 percent percent 8.6 percent Kentucky 8.4 percent 9.02 percent 7.1 percent Louisiana -4.9 percent percent 3.1 percent Maine 6.2 percent 6.66 percent 6.8 percent Maryland 8.4 percent 7.47 percent 6.4 percent Massachusetts 5.9 percent 6.27 percent 4.9 percent New Hampshire -1.3 percent 4.56 percent 2.2 percent New Jersey 3.9 percent 9.70 percent 6.2 percent New Mexico 13.4 percent percent 12.1 percent New York 5.3 percent 5.40 percent 6.4 percent North Carolina 11.8 percent percent 10.8 percent North Dakota 5.3 percent 6.98 percent 5.8 percent Ohio 5.6 percent 8.02 percent 6.5 percent Oklahoma 2.4 percent percent 7.8 percent Oregon 12.7 percent percent 14.2 percent Pennsylvania 9.5 percent 8.51 percent 6.8 percent Rhode Island 2.6 percent 7.88 percent 5.1 percent South Carolina 6.3 percent percent 8.0 percent South Dakota 5.6 percent 9.45 percent 7.9 percent Tennessee 6.4 percent percent 9.4 percent Texas 7.8 percent 5.71 percent 7.0 percent Utah 7.2 percent 7.14 percent 8.0 percent Vermont 9.6 percent percent 10.6 percent Virginia 6.1 percent 9.97 percent 7.9 percent Washington 8.4 percent 9.49 percent 9.0 percent West Virginia -0.1 percent 6.93 percent 5.6 percent Wisconsin 5.0 percent 8.85 percent 6.4 percent Wyoming 9.6 percent 7.01 percent 8.3 percent Michigan 6.3 percent 8.25 percent 7.4 percent Minnesota 6.1 percent 9.98 percent 8.1 percent Mississippi 9.2 percent percent 9.8 percent Missouri 8.7 percent percent 8.0 percent Montana 4.9 percent 7.91 percent 7.3 percent Nebraska 6.7 percent percent 10.8 percent Nevada 3.7 percent 9.32 percent 7.1 percent U.S. 5.9 percent 8.76 percent 7.3 percent Note: Medicaid expenditures include expenditures for benefits and Disproportionate Share Hospital payments. Source: Urban Institute estimates based on data from HCFA-64 reports. Does not include administrative costs, accounting adjustments, or the U.S. Territories. 14

16 While historical growth rates may be the only objective way to set state-specific growth rates, they are not necessarily good indicators of future Medicaid funding needs. States show very uneven patterns of expenditure growth. Table 2 (page 16) ranks states based on their expenditure growth rates during and A comparison of the two periods shows that only two of the ten states with the lowest growth rate in the first period (West Virginia and New Hampshire) were among the ten states with the lowest growth rates in the second period. Three of the states with the lowest growth rates in the first period (Kansas, Oklahoma, and Indiana) were among the ten states whose expenditures grew most rapidly during the second period. If Connecticut s below-average historical growth rates are built into the capped payment levels the state would receive over the next ten years, Connecticut will have an even more difficult time managing its costs and providing for its residents needs under a block grant. The block grant would change the fiscal incentives that encourage Connecticut to maintain investments in coverage. Under the President s proposal, a state could reduce its state spending without losing any of its capped federal payments as long as it met the new maintenance of effort (MOE) requirement. The opportunity to withdraw state funds has been touted by the Administration as one of the features of the block grant proposal that should be most appealing to governors. In fact, states may not be able to pull out all of the state funds that the new approach would permit them to withdraw because states may need to increase state funding to make up for federal funding shortfalls. Nonetheless, the potential for reduced state spending is significant. The MOE provision could result in the loss of $2.3 billion to $9.6 billion in Connecticut s funding for Medicaid services over the next ten years, compared to the amount of state funds that might otherwise be invested in Medicaid under current law. 24 Figure 4 Potential Loss of State Spending Under Maintenance of Effort (MOE) $10,000 $9,604 Lower Estimate $8,000 Higher Estimate millions of dollars $6,000 $4,000 $2,000 $0 $160 $446 $2, year loss ( ) $608 $1, year loss ( ) Note: Lower estimate shows the difference between MOE and state spending projections under current law assuming program expenditures grow at 5.38 percent (CT s Medicaid expenditure growth rate from ). Higher estimate shows the difference between MOE and state spending projections under current law assuming program expenditures grow at 9.39 percent (CBO 2003 Medicaid baseline growth rate for the years ). MOE growth is based on 2002 state expenditures adjusted by the Medical CPI projected by HHS. 15

17 Table 2 Medicaid Expenditures, Average Annual Growth Growth Growth New Mexico percent 1 Idaho percent 2 Hawaii percent 2 Alaska percent 3 Delaware percent 3 Kansas percent 4 Oregon percent 4 Indiana percent 5 North Carolina percent 5 Oregon percent 6 Vermont 9.59 percent 6 Oklahoma percent 7 Idaho 9.57 percent 7 Vermont percent 8 Wyoming 9.57 percent 8 Mississippi percent 9 Pennsylvania 9.52 percent 9 Tennessee percent 10 Mississippi 9.21 percent 10 Georgia percent 11 Alaska 8.98 percent 11 Nebraska percent 12 Missouri 8.69 percent 12 Arizona percent 13 Maryland 8.40 percent 13 Missouri percent 14 Washington 8.39 percent 14 Delaware percent 15 Kentucky 8.38 percent 15 New Mexico percent 16 Texas 7.76 percent 16 Louisiana percent 17 Alabama 7.68 percent 17 Colorado percent 18 Utah 7.20 percent 18 South Carolina percent 19 Illinois 6.89 percent 19 North Carolina percent 20 Florida 6.84 percent 20 Minnesota 9.98 percent 21 Nebraska 6.71 percent 21 Virginia 9.97 percent 22 Connecticut 6.55 percent 22 California 9.74 percent 23 Tennessee 6.45 percent 23 New Jersey 9.70 percent 24 Georgia 6.38 percent 24 District of Columbia 9.52 percent 25 South Carolina 6.35 percent 25 Washington 9.49 percent 26 Iowa 6.34 percent 26 Florida 9.48 percent 27 Arizona 6.26 percent 27 South Dakota 9.45 percent 28 Michigan 6.25 percent 28 Nevada 9.32 percent 29 Maine 6.24 percent 29 Arkansas 9.07 percent 30 Arkansas 6.24 percent 30 Kentucky 9.02 percent 31 Virginia 6.15 percent 31 Wisconsin 8.85 percent 32 Minnesota 6.11 percent 32 Pennsylvania 8.51 percent 33 Massachusetts 5.92 percent 33 Michigan 8.25 percent 34 South Dakota 5.64 percent 34 Ohio 8.02 percent 35 Ohio 5.61 percent 35 Montana 7.91 percent 36 North Dakota 5.33 percent 36 Rhode Island 7.88 percent 37 New York 5.26 percent 37 Maryland 7.47 percent 38 Wisconsin 5.03 percent 38 Alabama 7.41 percent 39 California 5.02 percent 39 Utah 7.14 percent 40 Colorado 5.02 percent 40 Wyoming 7.01 percent 41 Montana 4.94 percent 41 North Dakota 6.98 percent 42 New Jersey 3.87 percent 42 West Virginia 6.93 percent 43 District of Columbia 3.76 percent 43 Illinois 6.82 percent 44 Kansas 3.70 percent 44 Maine 6.66 percent 45 Nevada 3.68 percent 45 Massachusetts 6.27 percent 46 Rhode Island 2.57 percent 46 Iowa 6.08 percent 47 Oklahoma 2.35 percent 47 Texas 5.71 percent 48 West Virginia percent 48 New York 5.40 percent 49 New Hampshire percent 49 Connecticut 5.36 percent 50 Indiana percent 50 New Hampshire 4.56 percent 51 Louisiana percent 51 Hawaii 2.18 percent U.S percent U.S percent 16

18 Figure 5 Matching System Creates Incentives to Maintain State Investment in Optional Coverage CURRENT LAW PROPOSAL Federal dollars lost if CT reduces Medicaid spending by $125 million, at Medicaid and SCHIP match rates Federal dollars lost if CT reduces Medicaid spending by $125 million (assuming state meets MOE) Match Rate State Funds Withdrawn (millions) Federal Dollars Lost (millions) Total Reductions (millions) State Funds Withdrawn (millions) Federal Dollars Lost (millions) Total Reductions (millions) 50% $125 $125 $250 $125 $0 $125 65% $125 $232 $357 The substitution of an MOE requirement for the current matching system eliminates a key incentive for states to maintain their investment in the program. Figure 5 compares what would happen if Connecticut sought to withdraw $125 million in state funds under the current system and under the block grant structure. Under the existing financing rules, if Connecticut cuts state spending by $125 million, it loses $125 million in federal Medicaid funds (it would lose $232 million under the 65 percent SCHIP matching rate). By contrast, under the President s approach, the state could pull out these dollars and not lose any federal funds, as long as the state met its MOE requirement. The Medicaid program works largely through options and fiscal incentives. Under the existing structure, the potential loss of federal funds discourages but does not prevent states from cutting back on optional spending. If the incentives were to change, state-funding behavior can be expected to change as well. 17

19 Connecticut would not receive additional federal funds (above the capped payment) for improvements and expansions. As the economy improves, Connecticut might consider restoring some of the cutbacks it recently adopted or other ways to improve the coverage it offers to its residents. The block grant financing system, however, would make it difficult for Connecticut to take such steps. For example, if the state found that the loss of continuous eligibility periods for children impaired the state s ability to ensure that children received regular primary and preventive care, including immunizations, and wanted to reintroduce 12-month eligibility periods for children sometime in the future, the state would not receive any additional funds from the federal government to share the additional cost of this improvement. Similarly, if the state sought to restore coverage for low-income working parents, that cost too would have to be borne solely by the state or offset by cuts in spending for other beneficiaries. Figure 6 compares the financing consequences under current law versus a block grant of a state s decision to invest new state dollars to improve the program. Under current law, if Connecticut is considering a program improvement that would cost $250 million, that improvement would cost the state $125 million in state funds (less if the spending is through SCHIP) and the investment brings $125 million in new federal funds into the state. Under the block grant, the state would have to shoulder all of the cost of a $250 million program improvement, assuming it was already spending its full federal allotment. In addition, no new federal funds are leveraged through the state s investment.the change in the financing rules would remove the fiscal incentives that encourage states to invest funds to improve their programs and make it at least twice as expensive for a state to make improvements. Figure 6 Matching System Creates Incentives for State to Invest in Optional Coverage CURRENT LAW PROPOSAL Value of improvement and federal dollars gained if CT invests $125 million, at Medicaid and SCHIP match rates Value of improvement and federal dollars gained if CT invests $125 million (assuming the state is receiving its full federal allotment) Match Rate New State Investment (millions) Additional Federal Funds (millions) Total Value of Improvement (millions) New State Improvement (millions) Additional Federal Funds (millions) Total Value of Improvement (millions) 50% $125 $125 $250 $125 $0 $125 65% $125 $232 $357 18

20 Connecticut s Medicaid costs particularly for the elderly are much higher than costs in most other states. Block grants create a zero sum game. Unless a state is willing and able to shoulder new costs on its own, funding shortfalls and improvements in the program will need to be addressed by making reductions in the cost of serving those who are already covered by the program. Competition for limited funds is not new. State resources are not unlimited, and, therefore, different population groups and their providers are often, in effect, competing for available funds. Block grants, however, exacerbate the competition, by adding funding caps to the federal side of the equation. How might that competition be addressed in Connecticut? The answer to this question is beyond the scope of this paper, but it is important to recognize how Connecticut s current distribution of spending within the Medicaid program could affect the choices it will have to achieve savings under a block grant. Nationwide, states typically spend a far greater share of their Medicaid funds on services for the elderly and people with disabilities because of their relatively high need for medical care. The distribution in spending across groups is even more skewed in Connecticut for several reasons. Connecticut has a modestly larger elderly population than the nation as a whole (in 2002, 14.2 percent of its population was 65 years of age or older, compared to 12 percent for the nation 25 ). Most significantly, the cost of caring for the elderly is considerably higher in Connecticut than in most other states. Connecticut s spending per elderly beneficiary is close to the cost in New York, but well above the national average $21,980 in Connecticut compared to $10,362 for the nation. 26 As noted above, 43 percent of all of Connecticut s Medicaid spending is for the elderly and almost 39 percent is for the care provided to people with disabilities, accounting for over 80 percent of all Medicaid expenditures in the state. Children account for less than 14 percent of spending and parents and pregnant women less than 5 percent, even though they account for a much larger share of the number of people served under the program. Given this distribution of spending, if significant savings are to be achieved within the context of block grant funding, either major changes will need to be made in the number of elderly people and people with disabilities being served or in the cost of serving them, or spending for children, parents and pregnant women will need to be cut deeply (in addition to the reductions that have already occurred). Figure 7 Share of Medicaid Spending on the Elderly is Higher in CT than the US (2000) Connecticut United States Elderly 43.0% Blind/Disabled 38.5% Elderly 26.4% Blind/Disabled 43.2% Adults 4.7% Children 13.5% Adults 10.6% Children 15.9% Source: Georgetown University Health Policy Institute analysis based on Centers for Medicare and Medicaid Services MSIS 2000 data. 19

21 OTHER APPROACHES States from every area of the country are grappling with ways to manage their health care coverage and long-term care costs in the face of shrinking state revenues, rising health care costs, growing Medicaid enrollment due to the economic downturn, and an aging population. Solutions to these problems are needed and could take many forms, including the following: Having the federal government pick up the cost of providing drug coverage to low-income Medicare beneficiaries. As noted above, state Medicaid programs are currently responsible for the cost of providing prescription drugs to low-income seniors and people with disabilities who qualify for Medicare and Medicaid (the so-called dual eligibles ). This is a large and growing cost for states, and much of states fiscal problems could be alleviated if they were no longer responsible for these costs. An analysis by the Commonwealth Fund shows that Connecticut spent close to $137 million on prescription drug coverage for dual eligibles in Currently, Congress is debating a Medicare prescription drug bill that may or may not shift the cost of the drugs provided to low-income Medicare beneficiaries from state Medicaid programs to the federallyfinanced Medicare program. Figure 8 Medicaid Fills Medicare s Gaps Over One-Third of Medicaid Benefit Spending $68 billion is for Services for Medicare Beneficiaries This Grows Over Time with the Baby Boomers Retirement Spending on Medicare Beneficiaries 35% 65% Spending on All Other Beneficiaries Source: Secretary s Advisory Committee on Regulatory Reforms, June Data for

22 Shifting costs for dual eligibles from Medicaid to Medicare. State Medicaid programs also shoulder the cost of other services for Medicare beneficiaries that are not covered by Medicare, most notably long-term care. The federal government could take a number of steps to alleviate some of these costs. Most directly, it could pick up these costs under Medicare (quite an expensive undertaking for the federal government), or it could take a more modest step to provide states with a higher matching rate in Medicaid for some or all of these services. The federal government could also help states manage their dual eligible costs by giving states greater flexibility to manage the care of dual eligible individuals and allowing states that take steps to improve care (e.g., through disease management programs) to realize some of the savings that now accrue largely to the federal Medicare program (e.g., through reduced hospitalizations). Providing for automatic increases in the federal Medicaid matching rate during economic downturns. Recently, the federal government adopted a temporary adjustment in the federal Medicaid matching rate to address the higher Medicaid enrollment states experience during a downturn when more people lose their jobs and their employer-based insurance. This kind of adjustment could be built into the Medicaid program so that the federal matching rate automatically rose during a downturn. A bill cosponsored by Senator Bingaman (D-NM) and Congressman Dingell (D-MI) calls for this type of fiscal relief. Expanding state flexibility in certain areas. It is possible to consider flexibility proposals outside of the context of capped federal financing. In 1997, for example, federal law was revised to give states broad authority to require most beneficiaries to enroll in managed care and to set provider payment rates for nursing homes and hospitals. Changes in some of the current federal standards and options could be considered without linking those changes to capped federal financing. At the same time, it is important to consider the value of retaining national standards in key areas. 21

23 Increasing the Medicaid drug rebate and other measures to reduce prescription drug costs. Under current law, the price a state Medicaid program pays for prescription drugs is net of a rebate established by federal law. Drug manufacturers must pay this rebate amount as a condition of receiving Medicaid payments for outpatient drugs, but the rebate level has not been adjusted since it was first set in Some states have attempted to require drug companies doing business in their state to provide a supplemental rebate but these arrangements have been contentious for many reasons. An adjustment to the national rebate would benefit all states and has been endorsed by the President and by the NGA. Other approaches to bringing down drug costs include drug-pricing disclosures that could help inform states about whether the prices they are paying for drugs in their Medicaid programs are appropriate given the local market. Changes outside of the Medicaid program, such as proposals to limit direct-to- consumer advertising and to promote the availability of generic drugs could help bring public and private sector health costs down. Encouraging more long-term care services in the community. There are many reasons for addressing the need for more community-based, long-term care services, other than costs but cost savings are sometimes identified as a reason for shifting more long-term care into the community. Federal legislation sponsored by Senator Harkin (D-IA) would make home- and communitybased services a state option (rather than a waiver service as it is now under federal Medicaid law). If enacted, the bill would greatly expand the availability of community-based services, but the option would carry new costs because it would be available to a broader group of people than states have been covering through waivers. Additional approaches to expanding community-based, long-term care services have been suggested; for example, by making it easier for states to obtain and renew home- and community-based service waivers. In addition to these approaches that can help address cost-related issues, even in these difficult times, some states are looking for ways to use Medicaid to cover more of the uninsured. Options that would let states cover childless adults without having to seek a budget neutral waiver as well as approaches that could make coverage expansions less costly to states (e.g., by extending an enhanced federal matching payment to states that cover new populations) should be part of the mix of Medicaid restructuring measures if continued progress covering the uninsured is to be made.with 41 million uninsured people in this country and rapidly rising health care costs in both the private and public sectors threatening to push that number much higher, approaches are needed that move us forward, not backward, toward the goal of assuring that all people have access to health care. 22

24 CONCLUSION Connecticut s Medicaid program provides critical coverage and long-term care services to hundreds of thousands of its residents, but rising costs and declining revenues have created challenges for Connecticut and other states. Connecticut s relatively high expenditures for long-term care and its growing elderly population create major challenges for the state and its ability to serve all of its residents even under the current Medicaid financing structure. State Medicaid programs are the single largest source of funds for long-term care, and the demand for long-term care nursing home care as well as community-based care is growing. Solutions are needed to address these cost pressures; some of those solutions might involve providing states more flexibility to design program services and benefits and some might involve changes to Medicare and the broader health care marketplace. The question for Connecticut and other states is whether a cap on federal Medicaid financing, coupled with new programmatic flexibility, will move states closer to or farther from finding constructive solutions to address the growing demand for and cost of coverage and long-term care services. 23

25 Appendix Table 1 Medicaid Mandatory and Optional Eligible Groups MANDATORY GROUPS OPTIONAL GROUPS Children under age 6 < 133% Federal Poverty Line (FPL) Children and parents above minimum requirements Children age 6 and older < 100% FPL Pregnant women > 133% FPL Children in foster care Pregnant women < 133% FPL Parents with incomes below state-established minimums (median = 60% FPL) Disabled and elderly people > 74% FPL, including those in nursing homes Disabled and elderly people served under Home and Community Based waivers Elderly and disabled SSI beneficiaries (incomes < 74% FPL) Low-income Medicare beneficiaries Women with breast and cervical cancer Certain disabled people who are employed and buy into coverage Source: Kaiser Commission on Medicaid and the Uninsured, The Medicaid Resource Book, July

26 Appendix Table 2 Medicaid Statutory Services MANDATORY SERVICES OPTIONAL SERVICES Acute Care Physician, nurse practitioner and nurse midwife services Laboratory and x-ray services Inpatient and outpatient hospital services Screening and treatment services for children (EPSDT) Family planning services Federally-qualified health center (FQHC) and rural health clinic (RHC) services Prescribed drugs Medical care or remedial care furnished by licensed practitioners under state law Diagnostic, screening, preventive, and rehabilitative services Physical therapy and related services Prosthetic devices Eyeglasses TB-related services Primary care case management services Clinic services Other specified medical Dental services, dentures and remedial care Long-term Care Nursing facility services for people 21 years of age or older Home health care services (for people entitled to nursing facility care) Intermediate care facility for people with mental retardation (ICF/MR) services Respiratory care services for ventilator-dependent individuals Personal care services Inpatient and nursing facility services for people 65 or over in an institution for Private duty nursing services mental diseases (IMD) Hospice care Inpatient psychiatric hospital services for children Services furnished under a PACE program Home health care services Home and community- Case management services based (HCBS) services (under budget neutrality waiver) Source: Kaiser Commission on Medicaid and the Uninsured, The Medicaid Resource Book, July